What Is the Formula for Calculating Profit Margins?

Profit margins are perhaps one of the simplest and most widely used financial ratios in corporate finance. A company’s profit is calculated at three levels on its income statement, starting with the most basic—gross profit—and building up to the most comprehensive: net profit. Between these two lies operating profit. All three have corresponding profit margins calculated by dividing the profit figure by revenue and multiplying by 100.

KEY TAKEAWAYS

• Profit margin conveys the relative profitability of a firm or business activity by accounting for the costs involved in producing and selling goods.
• Margins can be computed from gross profit, operating profit, or net profit.
• The greater the profit margin, the better, but a high gross margin along with a small net margin may indicate something that needs further investigation.